San Bernardino judge wants look at pension costs

Pension cost cuts seemed unlikely after bankrupt San Bernardino agreed to repay CalPERS for skipped payments and adopted a recovery plan that only cuts bond and retiree health care debt, as in the previous Vallejo and Stockton bankruptcies.

Then this month U.S. Bankruptcy Judge Meredith Jury asked for more information showing that if she approves the San Bernardino recovery plan, rising payments to CalPERS will not push the city into a second bankruptcy.

“I don’t really think it’s in anybody’s objection, but the public perception — the media perception — of the two cities with confirmed (bankruptcy exit) plans, that being Vallejo and Stockton, is that they’re already in trouble because they didn’t impair CalPERS,” Jury said at a hearing on Oct. 8, as reported in the San Bernardino Sun.

“ . . . I don’t think there is adequate discussion of how much those raises are going to be. I have heard other things, I think in this court, that it is an exponentially increasing number that will have to be paid in order to keep retirement plans intact. There comes a point where no matter what I confirm it will fail.”

Judge Jury

Actuaries hired by the city project that payments to the California Public Employees Retirement System will more than double from the current level by fiscal 2023-24, reaching $29 million a year, the Sun reported.

In the latest CalPERS report for the San Bernardino plans (June 30, 2013), the police and firefighters rate is forecast to rise from 38.8 percent of pay this fiscal year to 49.3 percent in fiscal 2020-21, the miscellaneous rate from 24.2 to 32 percent of pay.

Last week an editorial in the Riverside Press-Enterprise, noting the judge’s remarks on Oct. 8, urged Jury to “put pensions on the table” and “insist that San Bernardino renegotiate its unsustainable contract with CalPERS.”

Pension cuts have not been proposed by the bankrupt cities. Vallejo said CalPERS threatened a costly legal battle. Stockton said pensions are needed to compete in the job market. San Bernardino mentioned a “fresh start” to stretch out CalPERS payments.

But in a landmark ruling in the Stockton bankruptcy last year, Judge Christopher Klein said California pensions can be cut in federal bankruptcy court, despite CalPERS-sponsored state laws to the contrary.

San Bernardino may have a deeper problem than the two cities that have already exited bankruptcy, putting more focus on pension savings. The city filed an emergency bankruptcy in August 2012, saying it was in danger of not being able to meet its payroll.

During the rest of the fiscal year, San Bernardino did not make any of the required payments to CalPERS totaling $13.5 million. After a legal battle and mediation, the city agreed last year to repay CalPERS with interest and penalties, a total of $18 million.

The recovery plan issued last May said San Bernardino “evolved from a city that was the epitome of middle-class living into one of the poorest communities in the United States” with a median household income of $38,000.

Political and financial turmoil continues. Two former city officials made allegations of falsified budgets and possible illegal wrongdoing after the bankruptcy filing. In a recall in November 2013, voters ousted a city attorney and a councilwoman.

An unusual San Bernardino city charter linking pay to the average in 10 similar cities has given police two $1 million pay raises during the bankruptcy. A proposal to end the pay link was rejected by 55 percent of voters last November.

Mayor Carey Davis unsuccessfully asked City Manager Alan Parker to resign last December, blaming him for slow bankruptcy progress. Last month Davis vetoed renewal of a contract for the son of a former mayor, a consultant supported by Parker and others.

At a stormy city council meeting this month, there were public protests and heated exchanges between council members over the failure to complete audits of city finances during the first two years of the bankruptcy.

Davis said in hindsight he should have used his gavel to end the council argument. “I have a gavel, but I don’t want to wear it out,” the mayor told the Sun. “Bring in the FBI/Complete the audits!” said a sign carried by one resident.

The San Bernardino recovery plan does not ask voters to approve a sales tax increase, unlike the 1-cent tax approved in Vallejo and ¾-cent tax approved in Stockton. The plan does expect some indirect savings in pension costs.

Payment for a $50 million bond issued to pay pension costs would be cut to $500,000, a deep debt reduction contested in court by bondholders. Contracting with the county for firefighter services is expected to save $2.7 million a year in pension costs.

Actuaries have told the city that shifting firefighters from CalPERS to the San Bernardino County Employees Retirement System would immediately reduce annual pension costs because the county has more quickly paid down pension debt.

Few details of the $2.7 million reduction were given to the council at a meeting in August. A Calpensions Public Records Act request for the actuarial report was denied by the city attorney‘s office, which cited several exemption laws and rulings.

Last week Vallejo and Stockton officials sharply disagreed with the view that the failure to cut their biggest debt, CalPERS pensions, is pushing them toward a second bankruptcy. But they said service levels have not been restored.

“We are not at risk of a second bankruptcy,” said Daniel Keen, the Vallejo city manager. “We would emphatically deny there is a possibility of a second bankruptcy.”

In a budget message last June, Keen said his “cautious optimism” is tempered by large long-term cost increases for CalPERS pensions, workers compensation, and health benefits.

“These fiscal challenges will continue to severely constrain our ability to rebuild services and infrastructure and deliver the service levels that our residents deserve,” Keen said in the budget message.

In the latest CalPERS report for the Vallejo plans (June 30, 2013), the police and firefighter rate is forecast to rise from 57.6 percent of pay this fiscal year to 72 percent of pay in fiscal 2020-21, the miscellaneous rate from 32.7 to 41.2 percent of pay.

The Stockton city manager, Kurt Wilson, said the city continues to follow the long-range financial plan developed in bankruptcy and has had a series of favorable financial developments.

“As a result we currently have a 20 percent ($40 million) general fund reserve which not only places us in possibly the strongest financial position in recent memory, but combined with our forecasting, gives us one of the strongest fiscal foundations in the state,” Wilson said via email last week.

“While our service level will remain below what it was several years ago, we are meeting our current needs in a fiscally responsible way and are in no way near the financial condition that necessitated the bankruptcy,” he said.

In the latest CalPERS report for the Stockton plans (June 30, 2013), the police and firefighter rate is forecast to rise from 45.5 percent of pay this fiscal year to 58.1 percent in fiscal 2020-21, the miscellaneous rate from 22.4 to 29.5 percent of pay.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 19 Oct 15

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26 Responses to “San Bernardino judge wants look at pension costs”

“In the latest CalPERS report for the Vallejo plans (June 30, 2013), the police and firefighter rate is forecast to rise from 57.6 percent of pay this fiscal year to 72 percent of pay in fiscal 2020-21, the miscellaneous rate from 32.7 to 41.2 percent of pay.”

Unbelievable. Contrast THIS to the 3% of pay that Private Sector Taxpayers typically get in retirement benefits via a matching 401K contribution.

If you do the calculations using appropriate and reasonable interest and mortality assumptions (akin to those REQUIRED of PRIVATE Sector Plans by US Gov’t Regulation) the extreme generosity of CA’s Safety worker pensions (3%@50) requires a level annual Normal Cost contribution of roughly 55%-of-pay to fully fund over the workers’ careers.

Having used FAR most liberal assumptions FOR DECADES, causing the huge current under-funding, it’s no surprise that 72%-of-pay is the new bogey for the full ARC (Normal Cost plus amortization of underfunded liabilities).

The bad part is that this 72% is STILL the result of using the SAME very LIBERAL assumptions. It’s would likely be over 100% with more appropriate and reasonable assumptions.
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Ed Mendel: “But in a landmark ruling in the Stockton bankruptcy last year, Judge Christopher Klein said California pensions can be cut in federal bankruptcy court, despite CalPERS-sponsored state laws to the contrary.”

I’d like to make a picky correction. What Klein meant was that CalPERS pensions for city and county employees can be cut. CalPERS pensions for state employees cannot be cut in federal bankruptcy court because these courts do not have jurisdiction over state governments.

Federal bankruptcy laws trump any statue created on the state level thanks to the Supremacy Clause of the US Constitution. If public workers want preferential treatment in bankruptcy cases, they had better start lobbying the Congress to make that happen. State laws are so much straw when it comes to this realm.

CalPERSon:

I agree with you since the Congress has passed no law allowing states to go bankrupt. Makes one wonder what is going to happen when state retirement systems start going insolvent in places like KY and IL. As lousy as CA is, there are state in worse shape than us. We still look to be many years away before the kitty goes dry.

Just was in Stockton at Bob Hope theater for an event, and at upscale shopping center. Hounded after concert by homeless, no police to be seen. Private security in place. Saw no police at shopping center, but there was ample private security.
This is in a strong economy.
They won t hire police, unless the “standards” are met. My suspicision is the process is corrupt, racist full of nepotism and cronyism. Expect the rest of city govt is more of this.
Do expect Stockton to be back in bankruptcy,

Chapter 9 bankruptcy is a little different, BC. Under Chapter 9, the ball is in the court of the city or county that is going through the process. If an entity wants to cut its pensions the judge either aprroves or not. The judge does not have the authority to force the entity to cut certain benefits. There have been only three bankruptcies in recent years and none of those entities proposed cutting pensions. If one comes along that does, a scenario that we have not seen before could occur.

Again, as I said in my post, Judge Klein expressed his opinions–those opinions are not part of the official ruling.

People forget private sector workers used to get pensions. And then corporations were allowed by the courts to walk away from them. That was back in the early 80’s. I saw the writing on the wall. I switched from a private sector job to a government job. It’s only a matter of time before those pensions vanish too.

Quoting SeeSaw …” The judge does not have the authority to force the entity to cut certain benefits. ”

I believe that you underestimate the power of the Bankruptcy judge with respect to pension reductions..

While you are correct that the judge cannot Force the Bankrupt entity to do specific things (such as reduce pensions and/or benefits), the judge has complete control over whether or not to approve a proposed Plan to exit Bankruptcy.

If the judge (given appropriate financial projections) believes that the entity will return to Bankruptcy without a reduction in pensions, he/she can simply refuse to approve any Plan that does not include such reductions. ….. and given the costs, no City wants to stay in Bankruptcy longer than absolutely necessary.

Quoting deadsurfer …”And then corporations were allowed by the courts to walk away from them. ”

That is an extremely misleading description of what has (in almost all cases) happened.

The Courts RARELY have anything to do with this. ERISA, which governs Private Sector pensions, allows Plan sponsors to freeze Plans completely or reduced the rate of accrual for FUTURE Service. Such freezes and reductions have indeed happened quite frequently in Private Sector Plans as Plan costs have risen (above expectations) due to the low interest environment and increasing life expectancy……. and even though the typical “generosity” level of PRIVATE Sector Plans is less than HALF that of Public Sector Plans. Do you think the very young full/unreduced retirement ages, and COLA-increases (never included in PRIVATE Sector Plans) common to all PUBLIC Sector pension Plans comes without great cost ?

The Gov’t should do the same for all CURRENT workers, NOT because it is (as some PUBLIC Sector Unions/workers like to say) “a race to the bottom”, but because it is the Private Sector with 85% of all workers, and where employers freely compete for talent, that set “market rate compensation”, NOT the Public Sector where compensation (and especially pensions & benefits) is materially distorted by collusion between the Public Sector Unions and our Elected Officials. Specifically, with the former BUYING the favorable votes of the latter (on Public Sector pay, pensions, and benefits) in exchange for Public Sector Union campaign contributions and election support.

What else would you call it except a race to the bottom when you want to cut the wages and pensions of public sector workers? It takes a constitutional amendment to cut formulas going forward for current employees; pension reform can be accomplished at the bargaining table, as was PEPRA. You are never going to have it all your way, so you might as well turn your attention to helping the poor–they need you more than anyone in the private sector who is employed.

SeeSaw, I call it Fair and Equal. There is ZERO justification for Public Sector workers to be compensated more than their Private Sector counterparts.

Whatever it takes to reduce FUTURE Service Public Sector compensation to a level no greater than that of comparable Private Sector workers should be pursued …. constitutional or otherwise.

If the Democratic (union-controlled) Legislature (and the Judges who adjudicate such issues… and don’t want their OWN pensions reduced) refuse to do allow such changes, Private Sector Taxpayers would be best served by finding a way (ANY way) to renege on these absurd pension & benefit promises.

In the Private Sector, corporate executive played fast and loose with all the pension rules… it is all documented in the book of WSJ Pulitzer Prize winner Ellen Schultz. The demise of pensions in the Private Sector was about as honest as all the fraud that led Wall Street to crash in 2008-2009.

401(k)’s are notorious for the skimming of *guaranteed* percentages by fund managers, for activities like taking multiple girlfriends and boyfriends to the Kentucky Derby. Read about Shankar Iyer and Penn Specialty. Your funds in a 401(k) are a ripe and exploited target for Private Sector fraud…. no law protects you from 5% per annum fees or 15% per annum fees charge by the Private Sector custodians of your 401(k).

Many- including Tough Lough – argue that all Private Sector greed can be excused because it is up to the US Government to catch and prosecute it all, and the US Government doesn’t do the job. This is the `its not wrong unless I’m caught doing it’ argument.

Which is not to say CalPERS etc are perfect angels. They’ve had some fraud too. And the 3%@50 for public safety, which is leading to 72% of salary employer (taxpayer) contributions are outrageous.

But in public employees are no more or less greedy than the private sector. Everybody wants to get a little more.

All the politics doesn’t change the mathematics though: DB plans, properly modest and well run, are the most economical and stable pension solution. Period. Longevity risk is eliminated. Fees historically have been kept low, and no CalPERS employees are sending their squeezes to the Kentucky Derby.

Public entities all over the US have not fallen into the funding traps that California (and Illinois, Rhode Island, etc) have done, and have kept their DB pensions well-run. Even in the private sector not every company went fraudulent, and there are quite a few well run DB plans still there.

Those are all the places we should look for solutions, not to the longevity-risk and fee plagued 401(k).

401(k) may be beneficial for those in higher income groups, and/or as a supplement for those who also have a DB plan. But for the lowest paid among us, it is a sick joke.

I have seen this quote before in a blog, but it was not attributed.

The original author was TERESA GHILARDUCCI:

“Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you. First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.”

Until the day you die.

Right now, lower paid public sector workers are protected from some of these dangers because saving for retirement is not an option. Typically 5 to 10 percent of their wages is withheld and it cannot be touched by the worker unless he leaves his job.

45 percent of Americans today have NO retirement savings, either DB or DC. And many of those who do have some, do not have enough.

Fortunately in my entity, we were entered into a 457 plan in the late 70’s as a benefit, if we did not have a dependent on our medical plan. It started out at less than $40/month. Eventually all employees regardless of whether or not they were receiving the benefit were allowed to join and make their own contributions. Then the plan (NILEC) went bankrupt in 1980 and the city closed its participation and contracted with the plan that it now still has. At the time of the bankruptcy of the first plan, all the funds that we individually held went into receivership; were kept from our control for three years without interest. When we got our accounts back, we started over. I eventually had to put my dependent on my medical plan and I went on saving diligently in it, on my own, until my retirement. My case is proof that most middle class people, or lower MC as I considered myself, would never be able to save enough in their own 457 plans to retire with what they would need to sustain their already frugal lifestyles. My 457 has paid for the groceries and other small needs since my retirement. It has lost and regained thousands of dollars throughout the years. (I just lost $7,000 in my 457 this past August.) At my age it will probably not recover completely. But it is still holding up better than any current CD or savings acct. can. My experience proves that the only type of retirement that anybody should have regardless of any supplement plans they have, is a DB pension. I have one–I am grateful. And anybody who tries to take it away is going to reap some ire–I hope you think it will be worth it.

Given your advanced age, you may not see the pension/benefit reductions that will assuredly impact those that follow you. Perhaps you should contemplate how YOUR GREED contributed to that avoidable outcome.

I worked for what I got TL–it has nothing to do with “deserve”. You have such a rotten attitude toward others that it will probably eat you alive before you ever have the opportunity to reach my “advanced age”.

SeeSaw, I strongly advocate for EQUAL Public/Private Sector compensation (pay, pension, and benefits) in comparable jobs, and given the current grossly excessive pensions & benefit promises, that’s going to require quite a reduction in pensions & benefits for CURRENT Public Sector workers.

Only those stuck in “greed” mode consider that to be a rotten attitude.

And all those private sector firms (United Health, General Dynamics, etc) that give far greater pension & benefits to their executive, paid for largely by the public dime…. unscathed, Tough Love?

And what about the military that allows retirement at age 37, and that has a huge (surely many trillions of $) pension deficit under GASB, but which is never accounted for because the military is mostly pay-as-you-go?

There are VERY few Private Sector companies so overwhelmingly dominant in their field that the consumers of their products do not have the option to shop elsewhere if they feel the price is too high …. perhaps (in a small way) contributed to via the cost of executive compensation. Only customers who FREELY CHOOSE to shop (or invest as shareholders) with such companies pay for the cost of such excessive compensation. No one is FORCED to do so.

That structure is VERY different from the PUBLIC Sector, where ALL workers are granted grossly excessive pensions & benefits with TYPICALLY 80-90% of the total cost being the responsibility of the Taxpayers ….. Taxpayers who DO NOT have a choice to shop elsewhere (for police, fire, DPW, etc service) and MUST pay taxes demanded under threat of jail or confiscation of property.
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The military, like other Federal employees is a different matter (at least theoretically) because the Federal Gov’t has a money tree (the printing press).

How about a condition: a company cannot take a dime in public money or tax breaks unless all its retirement packages (parachutes, etc) amount to less than $100K a year?

Nobody freely chooses to enter into public contracts with any company; the same legislative process governs awarding of public contracts as awards public pensions. Everyone **IS FORCED** to pay excessive public compensation to the heads of General Dynamics, United Health, etc.

So you think some government pensions should not be analyzed with GASB? Nice. BTW, the government can print money for anything it wants… for military pensions, for Wall Street Bailouts, and for state and local government pension bailouts…. I’m not advocating it, but you are making a false distinction.